Stocks May Get One More European Scare

European timelines leave the door open to ongoing stock market volatility
within the context of a bullish trend. Stocks have reacted positively to significant
European progress, but firm debt crisis decisions may not come for another
six weeks due to the following:

Spain must request formal assistance before any new bond buying program
can begin.

The European Central Bank (ECB) is requiring the eurozone's permanent bailout
fund, the European Stability Mechanism (ESM), to be in place prior to taking
additional action.

The ESM has been challenged in the German court system with an expected
approval not coming until September 12.

Since financial markets are always looking forward, stocks are handicapping
mechanisms providing insight as to the odds of hurdles 1 through 3 being crossed
above. Said another way, the markets can help us answer the question, "Will
Europe get their act together?" The current answer from the markets appears
to be "yes".

When traders study charts, they know a healthy market tends to remain above
both the 50-day and 200-day moving averages. If the slopes of the 50-day and
200-day are positive, it is indicative of a rising trend. As shown in the table
below, the answer to all four questions is "yes".

In a May 25 video,
we noted numerous technical signals that told us to be open to a rally attempt
in risk assets. The chart below shows the S&P 500's 50-day moving average
in blue and 200-day moving average in red. The rally attempt off the June lows
has successfully morphed into an uptrend.

The markets know that full-blown, Greece-like bailouts for Spain and Italy
would overwhelm the European bailout fund. A "full" bailout implies a country
can no longer access capital in the open market (sell bonds). Reuters describes
the attempted workaround crafted by the ECB:

The aim of the plan taking shape is to keep Spain and Italy in the capital
markets at an affordable cost both to them and to euro zone governments,
whose rescue funds are too small to cover Spain's full funding needs for
three years, let alone Italy's.

The August 4 video below highlights a bullish bias in numerous markets, including
the S&P 500, Dow, and EAFE Index (foreign stocks). After you click play,
use the button in the lower-right corner of the video player to view in full-screen
mode. Hit Esc to exit full-screen mode.

A basic tenet of chart analysis is that a trendline that previously acted
as resistance for prices (see blue arrow below) may provide support (pink arrow)
once it has been broken. The present day S&P 500 (shown below) has followed
the trendline break script thus far, providing additional support for the bullish
case.

As long as Europe inches forward on debt crisis solutions and the trend in
stocks is up, we will continue to give the bulls the benefit of the doubt.

Chris Ciovacco is the Chief Investment Officer for Ciovacco
Capital Management, LLC. More on the web at www.ciovaccocapital.com.

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